Understanding Portfolio Trading

 

Anyone with a decent amount of trading knowledge will tell you that trading in bonds is an entirely different beast compared to other securities. Such an endeavor is quite complex, and will eventually require you to partake in several things, one of which is portfolio trading, which trades multiple bonds at once, as a bundle. So, what exactly is this practice, and what does it entail?

 

Well, the following will answer that as we look at how the practice is undertaken. It would also be appropriate to look at why this practice is a worthy endeavor for bond traders. Without further delay, let's get into it!

 

Contents:

- The gist of things

- Impact of portfolio

- How it works

- How else it's helped things

- The role of tech in all operations

- Final thoughts

The gist of things

To understand portfolio trading you need to know about the nature of bond trading, and as hinted at above, trades involving them are not the same as with your average stock. For example, unlike stocks, bonds aren't traded on exchanges, and for the most part, still operate the old-school way of setting things up by phone.

 

In addition to this, a great number of conditions have to be met during bond trading, as per purchase agreement or indenture, and some of these include the following:

- The bond's general terms and conditions

- The bond's characteristics

- The conditions for underwriters to get out of contracts without consequence

- The bond's buying price, and accompanying interest rates

Impact of portfolio

The above shows that bonds are much more difficult to sell than most other securities. So, how does portfolio trading lessen the impact of these glaring issues? Well, it greatly lessens the absurd burden of attempting to trade individual bonds, by allowing you to throw many into the deal. Doing this not only reduces the labor and time spent selling bonds, one after the other, but it also achieves the following:

- Efficiency is greatly improved, especially on the buy side of things

- The portfolio-based outlook makes replicating tactics easier

- Market slippage diminishes

- Liquidity greatly improves when bonds lacking it are made part of a collective

- It helps curb risk on the operational level

 

As it stands, trading in this way is becoming increasingly popular, especially with brokers and platforms that actively choose to follow the said path. You can do research and check sample codes and examples to know more about trading, data, and niche solutions. The short period in which these trades take place is beyond attractive to them, along with the above advantages.

 

How it works

The typical mode of operation goes like this: the purchasing side sees something of interest it wishes to trade. And using a platform of choice decides to directly send out orders to a counterparty or more.

 

Based on a few key factors such as how liquid singular issues are, and the likelihood of ETFs including them, those receiving the orders send back a quote showing how all the portfolio's securities are valued. Afterwards, some negotiation naturally follows, which hopefully for the issuing side, ends in a deal with a counterparty.

 

How else it's helped things

It's probably safe to say that confidence in holding bonds in inventory hasn't been as high as it was before 2008's crisis, and understandably so. This, as you would imagine, affected liquidity in the same period, something that volatility does not help with in the least, leading to many accepting unfavorable prices they otherwise wouldn't.

 

When put into bundles, however, each bond gets a price in one day, and this includes undesirable ones that ETFs help out by covering the whole quality spectrum, and every corporate sector.

 

The role of tech in all operations

To put it bluntly, without the right pieces of tech to help facilitate both sides of trading, the growth of this bundle-based path would not be what it is. An element of this comes in the form of platforms that put extra emphasis on the increased transparency that follows the execution of trades. This makes trading with them appear far better than any alternative because you get some good information that helps out with analyzing costs.

 

In addition to this, firms need to have systems in place that allow for convenient setting up of things. As stated above, bonds aren't as relatively easy to handle as other securities tend to be. This means that a tech-based manner of handling things like building bundles, evaluating them, or changing strategies to help achieve the best outcome needs to be in play.

 

Final thoughts

For the uninitiated, it's worth knowing that the bond market is much larger than the stock market, and yet being a participant is considerably more complex. As such knowing how to get the best out of it is highly important, which is why portfolio trading is so vital. It makes trading in bonds considerably easier and ultimately more accessible to interested parties.

 

This, however, is only possible today with the right tech. With said tech, both sides of the bond trading space can do a lot more than usual, all of it without the usual hassle of things, making portfolio trading the convenient choice.

 

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